February 2004 Newsletter

WHAT'S NEW IN TAXES

IRS cautions taxpayers about donating vehicles

It's estimated that over 4,000 charities are aggressively soliciting contributions of vehicles. Concerned that taxpayers may be getting oversold on how much such contributions actually benefit a charity, the IRS recently issued a consumer alert. The IRS suggests that before donating a car to an organization, you check to be sure the group is a qualified charity. Then calculate the actual fair market value of the car. Only the current market value of the vehicle may be deducted, says the IRS, not the original purchase price or what you think your car is worth.

Military Tax Relief Act signed into law

Last November, President Bush signed the Military Family Tax Relief Act of 2003 providing a number of important tax breaks for those in the armed forces.

* Survivor benefits. The law doubled to $12,000 the benefit paid to survivors of those killed in military service and made the entire amount tax-free.

* Home sale exclusion. The law liberalized the home sale gain exclusion rules so those on extended duty in the armed services can still qualify when they sell their homes.

* Travel expense deductions. The new law provides an above-the-line tax deduction for the overnight travel expenses of National Guard and Reserve members.

* Retroactive provisions. Some provisions are retroactive and could provide tax refunds on amended returns. Contact us if you would like details.

WHAT'S NEW IN FINANCIAL STRATEGIES

Take steps to make 2004 a good year

Make 2004 a better year than last by tidying up your financial and tax house. Here are some tips to get you started.

* Identify your tax opportunities for 2004. There are many credits and deductions available to you in such areas as retirement, education, home ownership, and child care. Identify those that will reduce your taxes, and make sure to qualify for all of the deductions and credits that are available to you.

* Plan your portfolio for 2004. Because of the lower tax rates on both dividends and long-term capital gains, think about restructuring your portfolio in 2004 to take advantage of the lower taxes provided by that income.

* Rid yourself of "stuff" you don't use. Are you paying for a cell phone you rarely use? A magazine you never read? A mail-order video service you forgot about? An extra cable box for that basement TV you never watch? A membership to a gym you rarely attend? If so, now is the time to dump those wasted services and pocket the cash.

* Plan for your retirement. Did you know that you could put more money into a retirement account than ever before? If you're age 50 or older, you can even make additional catch-up contributions. And all of these retirement programs allow you to put this money away while reducing your current taxes. Does your employer match some of your 401(k) contributions? Then consider making at least that much of a contribution in order to maximize the benefit of your 401(k) plan.

* Get a grip on your debt. Take a look at your current debt, especially your credit card debt. If you have good credit, and you have greater than a 12% rate on any of your cards, ask the credit card company for an interest rate reduction. Or consider transferring that balance to a lower interest credit card. Remember that personal interest isn't deductible (such as credit card interest and auto loan interest), so consider paying off that debt with a lower rate deductible home-equity loan.

* Get that new filing system started now. Purge your 2003 files. Destroy documents that you don't need. Create new files for your 2004 documents. Keep a tax and financial calendar that shows all deadlines for making payments and filing returns. And if you don't have a filing system, create one in order to organize and locate your tax and financial records.

If you need help with your tax and financial affairs, give us a call.

Don't cash out the equity in your home just because it's there

With today's low interest rates, homeowners have been flocking to refinance their mortgages. But instead of reducing their payment by the maximum amount, many have increased the size of their mortgage to tap into the home's equity. Part of the new loan pays off the old mortgage, and the remainder is paid in cash.

Although instant cash is always tempting, you should think carefully before cashing out the equity in your home. Whether it's a good or bad idea depends on your financial situation and how you intend to use the cash. For example, using the cash to pay off high-interest credit card balances might seem like a good idea. But first you should look carefully at your personal economic situation. If you can't make the loan payments, you stand to lose your home.

The economy seems to be recovering, but there's still high unemployment and more job cuts being announced every month. Even though interest rates have fallen, mortgage foreclosures are still high. Many individuals are stretched well beyond their financial means. This is not the climate to casually take on extra debt.

Before you increase the size of your mortgage, consider your financial situation. Is your job secure, or is there a possibility of losing your job? If you lose your job, how are you positioned to meet your monthly payments? How quickly could you find another job? What if you need to relocate, but you can't sell your home for enough to cover the mortgage? Do you have a cash reserve for unexpected financial emergencies?

While refinancing might make sense to lower your interest rate or shorten your loan's term, exercise caution when it comes to cashing out your home's equity. Call us if you want to discuss whether refinancing makes sense in your situation.

CHUCKLE OF THE MONTH

Truths adults have learned —

* Raising teenagers is like trying to nail Jell-O to a tree.

* Middle age is when you choose cereal for the fiber, not the toy.

* If you can remain calm, you don't have all the facts.

*You're getting old when you stoop to tie your shoes and wonder what else you can do while you're down there.

*You appreciate the fact that wrinkles don't hurt.

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The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information on anything in ONLINE ADVISOR, or for assistance with any of your tax, business, or financial strategy concerns, contact our office.

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